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Re: biomaven0 post# 123455

Saturday, 07/16/2011 3:52:32 AM

Saturday, July 16, 2011 3:52:32 AM

Post# of 251699

Short 100 shares at $10 - $1,000 at risk.
Stock goes down to $9 - now you have only $900 dollars at risk, so you short another 11 shares (roughly). Continue in this way and you will make make the same amount from continuing declines as you would if you were long the stock but sold some each time it went up, so as to keep your total dollar at risk the same.



This not accurate.

Short a 100 shares at $10 and you spend $1,000, but you do not know your risk. Shorting stocks is an undefined risk transaction.

The stock goes from $10 to $20. You now have to pay into your account another $1,000 to cover the stock. It goes to $30. You have to put in another $1,000. You;ve now lost $2,000 on your original $1,000 investment.

The more the position goes against you, the higher your loss. If the stock goes up to infinity, your risk is infinity.

If you are long, the worst that can happen is you lose 100% of your money if the stock goes to zero. This is not true for a short. Your los could be ewual to 200%, 300% or more of your original investment.

This is why puts are more attractive than shorting, IMO. There is an absolute defined loss (the cost of the put).

If you are shorting against the box (sell to open in an account with an existing long position), then the calculations are different. As long as you don't short more shares than you are long then you can cover with the shares in your account. Shorting against the box is rare these days as most biotech company option chains offer reasonable liquidity and spread (an unappreciated side effect of the 2007 Dendreon CTGT panel meeting).

Unless otherwise indicated, this is the personal viewpoint of David
Miller and not necessarily that of Biotech Stock Research, LLC.
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